Predictions for February

February will be a wild ride for mortgage rates. Market-moving news will leave rates different than they were in January. The only question is, will they be more or less favorable for mortgage shoppers?

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Rate forecasts for 2018 pretty much came true. Most major housing and financial authorities predicted rates somewhere between 4.7% and 5.0%.

That’s right about where everything ended up.

Rising rates aren’t expected to take a breather in 2019, though. The same housing agencies that were “spot on” with their forecasts in 2018 are predicting rates in the low- to mid-5s in the new year.

Been looking for a good rate on a refinance or home purchase? Now might be the time to lock.

The stock market could falter, helping rates

The market has since recovered, but is nowhere near stable ground, thanks to strained China-U.S. relations, and, oh yeah, nearly one million furloughed government workers.

What’s a shaky market got to do with mortgage rates? A lot.

High-risk markets get investors moving towards safer assets, such as mortgage-backed securities (MBS), upon which mortgage rates are based.

The more money piles into MBS, the lower rates go.

Why are MBS popular in an uncertain world? If you can make 10 percent per year in the stock market, you move all your money there. If you’ll lose 10 percent per year, you move your money to low-risk assets, even if they provide lower returns.

If you’ll lose 10 percent per year in the stock market, you move your money to low-risk assets, even if they provide lower returns.

MBS are viewed as a low-risk investment.

Bottom line: Expect rates to fall in the event of a February stock rout.

Government shutdown could have lasting effect on mortgage rates

At the time of this writing, the government has been shut down for 32 days.

32 days.

It’s the longest shutdown in U.S. history by far. It beats President Bill Clinton’s 21-day closure from December 1995 to January 1996 over a dispute with the GOP Congress.

Whether or not the “closed for business” sign still hangs on the White House door in February, the economy will still feel the effects that month and beyond.

As mentioned earlier, a shaky economy leads to lower mortgage rates. In this way, the shutdown might benefit mortgage shoppers, even as it casts a pall over the broader economy. There are two ways the shutdown will affect interest rates.

1. The economy could falter because of the shutdown

First, and the most obvious, is that 800,000 government workers are not receiving paychecks. They spend and invest less. This eats away at the U.S. economy more than you might think.

The New York Times reports an estimated reduction in quarterly growth of 0.13% for each week the government is shut down. This is according to the Trump Administration itself.

The New York Times reports an estimated reduction in quarterly growth of 0.13% for each week the government is shut down.

That means the economy has lost nearly 0.6% in growth at the time of this writing. That’s significant, considering that the first quarter of 2018 saw only a 2.2% economic increase. That means the shutdown has eaten away about 25% of the quarter’s growth so far, and that number rises with each additional day.

Even if the shutdown ends immediately, the economy is still on shaky ground. Ironically, this may benefit mortgage consumers. Investors must deal with less growth and an unpredictable government. This may lead them to buy into safer assets like the bonds that determine mortgage rates.

Rates fall when these types of bonds are in demand.

2. Expect volatility in February thanks to the shutdown

As mentioned, this is the longest shutdown in U.S. history at 32 days.

We are in uncharted waters as to the lasting effects. Will a 40- or 50-day shutdown do long-term damage to the economy? No one knows.

Adding to uncertainty, government economic reports are on hold while government workers are furloughed. Investors rely on these reports to decide where to place investments.

In February, we could see surprising volatility as investors digest monthly reports that haven’t been released in 60 days.

It’s hard enough to interpret data from these reports. To complicate matters, investors will need to decide whether changes are shutdown-induced or the start of a trend.

You’ll see lots of gyrations in mortgage rates as investors sort out the data. Be ready to lock if mortgage rates fall in your favor. Good rates often last hours, not days.

Homeowners might finally be eligible for a refinance

Rates were too high for most homeowners to benefit. Unless they needed a huge amount of cash via a cash-out refinance, they didn’t touch their 4% mortgage.

But a window of opportunity is opening again.

As of the time of this writing, mortgage rates were as low as in April 2018 according to housing agency Freddie Mac. Thirty-year mortgage rates averaged just 4.45 percent for the week of January 17.

Mortgage rates are down nearly 50 basis points (0.50%) since their November highs.

That’s a savings of $90 per month on a $300,000 loan.

If rates keep dropping, refinance shoppers may be enticed to pull the trigger. That’s especially true for those getting into a 15-year loan or turning their home equity into cash via a cash-out refinance. Still others may refinance to cancel their PMI or because their credit has improved.

How low do rates have to go before you consider a refinance? It depends on your current rate, of course. But, if you can save $100 per month or more, it’s worth looking into.

Mortgage lenders are more likely to approve your loan

Because rates rose in 2018, lenders are desperate.

Mortgage refinance applications are down more than 30% compared to one year ago, according to the Mortgage Bankers Association.

For this reason, home purchase and refinance applicants should try and try again if they get denied. Remember: shopping for a mortgage is like shopping for anything else. There are hundreds of sources from which you can buy. If you are denied, try again.

Mortgage companies are likely to stir up business by loosening guidelines in 2019. Higher debt-to-income ratios and lower credit scores may be allowed.

Frustrated mortgage applicants could finally get a “yes.”

Loan product rate updates

Many mortgage shoppers don’t realize there are many different types of mortgage rates. But this knowledge can help home buyers and refinancing households find the best value for their situation.

Following are updates for specific loan types and their corresponding rates.

Conventional loan rates

According to loan software company Ellie Mae, the 30-year mortgage rate averaged 5.19% in December.

This is higher than Freddie Mac’s 4.55% average because it factors in low credit and low-down-payment conventional loan closings, which tend to come with higher rates. Additionally, the most recent Ellie Mae report shows rate levels before they started dropping.

Lower credit score borrowers can use conventional loans, but these loans are more suited for those with decent credit and at least 3% down. Five percent down is preferable due to higher rates that come with lower down payments.

Twenty percent of equity is preferred when refinancing.

With adequate equity in the home, a conventional refinance can pay off any loan type. Got an Alt-A, subprime, or high-PMI loan? A conventional refi can take care of it.

For instance, say you purchased a home three years ago with an FHA loan at 3.5% down. Since then, home values have skyrocketed.

VA mortgage rates

If you’ve experienced a loss of income or diminished savings, a VA streamline can get you into a lower rate and better financial situation. This is true even when you wouldn’t qualify for a standard refinance.

But don’t overlook the VA loan for home buying. It requires zero down payment. That means if you have the cash for closing costs, or can get them paid for by the seller, you can buy a home without raising any additional funds.

Don’t overlook the VA loan for home buying. It requires zero down payment.

VA mortgages are offered by local and national lenders, not by the government directly.

This public-private partnership offers consumers the best of both worlds: strong government backing and the convenience and speed of a private company.

Most lenders will accept scores down to 620, or even lower. Plus, you don’t pay high interest rates for low scores.

Quite the contrary, VA loans come with the lowest rates of all loan types according to Ellie Mae. In December, 30-year VA mortgage rates averaged just 5.01% while conventional loans averaged 5.19%

USDA mortgage rates

Like FHA and VA, current USDA loan holders can refinance via a “streamlined” process.

With the USDA streamline refinance, you don’t need a new appraisal. You don’t even have to qualify using your current income. The lender will only make sure that you are still within USDA income limits.